Beware cannibalization

“The question on long term strategy is not if it is successful, but if you are still alive.” –Ron de Jonge

A “cannibal” is defined as a creature that eats the flesh of its own kind; in business, “cannibal” is used in a figurative sense (one hopes!) to describe a concept whereby you devour your own sales to preserve or increase market share. Needless to say, it’s an extremely risky strategy at best – one fraught with all kinds of pitfalls – and it’s also one that gets used quite frequently in trucking, usually with unfortunate results over the long-term.

I’m talking, of course, about price cutting – a strategy in trucking whereby freight rates get sliced in order to win business. Often times, though, such freight rate cuts aren’t done internally – they are in many cases forced on the industry by shippers that no longer recognize the value of the transportation service they buy.

In any event, whether self-inflicted or not, such cuts in the price of trucking services leads to cutbacks in other areas – maintenance, driver pay, new equipment, etc. – that end up hurting the carrier, sometimes severely, in the long term. In effect, they are cannibalizing themselves to survive, but it’s a strategy that by its very nature doesn’t offer hope of long term survival.

“The big mistake we make in the trucking industry is we allow sales to set price,” noted my editorial compatriot Timothy Brady in a recent post on his blog.

“The attitude of ‘price is everything’ in the trucking business has caused what was once a vibrant and prosperous service to become an afterthought,” he said. “Frankly, I don’t believe any service or product’s value is determined by price alone. If I sell services at prices that are less than it costs me to provide them, I’m not going to be in business very long. When the customer has a problem with the service and I’m not around to help solve the problem, suddenly that service loses value to that customer.”

What gives a service value, in Brady’s view, is a combination of reasonable price (one that is profitable to the provider), acceptable quality to the customer, and a provider that solves problems when the service doesn’t attain its objective.

“Customers don’t buy price; they buy value. If a product or service’s sale price is less than its cost, it has no value,” he noted. “Discounts can be a great sales tool if used properly. [But] when a hauling rate doesn’t add value for the shipper, it’s a ball-and-chain dragging a trucking company to extinction.”

Professor Jerry Osteryoung with the college of business at Florida State University noted that at times, a price-centric focus may be necessary – event vital – for short term survival. But such “cannibalization” as he calls it is not a road map for long-term success.

“Cannibalization is a business concept where you devour your own sales to preserve or increase market share,” he explained. “For example, BlackBerry is a firm that really understands this concept. They continue to roll out new BlackBerries knowing that by offering new products, some of their existing phones are going to suffer losses in sales. However, by offering new products in new markets, they cover the cost of this cannibalization with the new sales and they stop competition from entering the market.”

However, Osteryoung stressed that it is vital that businesses understand that they must run the numbers to determine whether cannibalization or market expansion makes sense.

“For example, if you are going to offer a new product and you know that you are going to lose 50% of your revenue on an existing product line, the new product must be able to generate a return high enough to cover the cannibalization cost,” he noted. “When considering cannibalization, ask yourself whether it is actually necessary. Sometimes … you’re not really bringing in more customers by offering the lower price. Instead, you may be just shifting customers … [resulting in] a significant drop in price and margins.”

From Brady’s perspective, it’s akin to a professional football coach entering a game without knowing how the game is played, without knowing the strength and weaknesses of his team, without having a game plan customized specifically for the opponents he’s going up against – he’s only focused on one aspect of the game (in the trucker’s case, price) to the detriment of everything else.

“The end result: the opposing team will steam-roll the unprepared one, and the outcome isn’t going to be pretty,” Brady said. “But if you understand how business is conducted – the more you know about logistics, the concept of supply and demand, and the more precise information you have on what it costs to haul a load – that offers the greatest opportunity for success. That knowledge is real power.”